Big Money Takes Fat Positions in This Stock

Who knew that diabetes medication could help you lose weight?

Once an underground trend, Novo Nordisk’s (NVO) Ozempic blew up as people reported stunning results.

Unfortunately, that shorted people who needed the diabetes medication.

The boat seems to have right-sized itself with the public switching to the regulated Weygovy, a similar drug approved for obesity in 2021.

But the stunning 174% growth in obesity care sales during the first nine months of 2023 is precisely why financial managers with more than $1 billion under management have been looking at Novo Nordisk in earnest, according to our Trackstar data.

Normally, you’d expect shares to be priced through the stratosphere. But they’re surprisingly reasonable given the hype, making this a potential pick for the savvy investor.

Novo Nordisk Business

Denmark’s Novo Nordisk started more than a century ago with a mission to defeat chronic conditions such as diabetes.

They became a pioneer in the field, serving millions of people in over 170 countries. Their primary focus is diabetes and insulin. However, they offer treatments for obesity, hemophilia, growth disorders, and other chronic diseases, with a robust pipeline:

Source: NVO Investor Relations

Their revenues divide along those same lines with diabetes accounting for 75% of sales, Obesity around 20%, and the remainder under the rare disease umbrella.

Novo Nordisk’s obesity treatment sales growth skyrocketed as the public became aware of Wegovy, the formal treatment for weight loss with similar active ingredients to Ozempic.

Source: NVO Investor Relations

Management expects average annual growth around 30% through 2031, hitting as high as $32 billion in sales, which is just mind blowing.

That’s on top of their typical business, with diabetes care growing at double digits by itself.

Financials

Source: Stock Analysis

Novo Nordisk’s overall revenues climbed 33% YoY last quarter, a feat they expect to replicate for the next several quarters.

At some point sales will slow from +174% YoY to +30%. However, that may take a few years to realize.

In the meantime, they enjoy fantastic profits with an incredible free cash flow margin.

And with little debt, they’ll have the firepower to acquire growth and pay back shareholders with roughly $9 billion per year, or a yield of just below 2%.

Valuation

Source: Seeking Alpha

Now, a P/E ratio near 40x might seem high. But consider the Price-to-Earnings growth is 0.96x. That’s essentially saying we’re paying below fair value for the project growth so long as they sustain it.

You could make the same argument for Bristol-Myers Squibb (BMY). However, they don’t have multiple years of earnings growth, nor do they expect to keep up the earnings growth rate.

Also of note – Novo Nordisk trades just below 30x cash while Biogen (BIIB) trades at 27x.

That suggests either Biogen is way overvalued or Novo Nordisk is undervalued.

Growth

Source: Seeking Alpha

None of Novo Nordisk’s peers come close to their sales growth.

The closest is Johnson & Johnson (JNJ), which saw revenues climb +16% YoY. But even they, like everyone else except Novo Nordisk, expect sales to drop next year.

Profitability

Source: Seeking Alpha

Novo Nordisk is making so much money from its growth because it already leverages existing infrastructure. They didn’t develop a new drug they needed to manufacture like the Covid treatments.

That’s helped them increase margins through efficiency and deliver stunning returns across the board.

Our Opinion 9/10

Despite the high prices, we believe Novo Nordisk could double from here.

The majority of the obesity drug growth came from the U.S. There’s still plenty of international growth as well.

Would we like a pullback? Absolutely. $80 would be a great entry spot.

But we would be fine also stepping in with a small position here.

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